News: The Reserve Bank of India (RBI) has relaxed priority sector lending (PSL) norms for small finance banks (SFBs).
About Priority Sector Lending (PSL)
- It refers to the mandatory lending targets set by the Reserve Bank of India (RBI) for banks and financial institutions to ensure that certain sectors of the economy receive adequate credit and financial support.
- These guidelines are issued under the Banking Regulation Act, 1949.
- Objective: The objective of priority sector lending is to promote inclusive growth, reduce regional imbalances, and support marginalized sections of society.
- Sectors included: The sectors under PSL include:
- Agriculture
- Micro, Small and Medium Enterprises (MSMEs)
- Education
- Housing
- Renewable energy
- Export credit
- Social infrastructure
- PSL Targets for Banks
- Domestic commercial and Foreign Banks with 20 branches and above – The overall PSL target is set at 40 per cent of their total adjusted net bank credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE).
- Foreign Banks with less than 20 B branches – The overall PSL target is set at 40 per cent of ANBC or CEOBE, whichever is higher.
- Of this, up to 32 per cent can be for export credit and not less than 8 per cent must be for any other priority sector.
- For regional rural banks – The total PSL target is 75 per cent of ANBC or CEOBE whichever is higher.
- For small finance banks (SFBs) – The total PSL target is 60 per cent of ANBC or CEOBE whichever is higher.
- Primary (Urban) Co-operative Banks (UCBs) – PSL Target of 60 per cent of ANBC or CEOBE, whichever is higher.
- Payment Banks – Not subject to PSL targets.
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Revised RBI Guidelines for PSL BY SFBs
- Earlier: As per the ‘Guidelines for Licensing of Small Finance Banks in Private Sector’ dated 27 November 2014 a SFB was required to extend 75% of its ANBC or CEOBE to the sectors eligible for classification as priority sector lending (PSL).
- Allocations: 40% of its ANBC or CEOBE should be allocated to different sub-sectors under PSL; the SFB can allocate the balance 35% to any one or more sub-sectors where it has competitive advantage.
- Present scenario: Now, from the financial year 2025-26 onwards, the additional component (35%) of PSL shall be reduced to 20%, thereby making the overall PSL target as 60% of ANBC or CEOBE, whichever is higher.
About Small Finance Banks (SFBs)
- They are specialized financial institutions established with the primary goal of fostering financial inclusion by offering basic banking services to underserved and unbanked segments of society.
- Key Features of Small Finance Banks
- Regulated by the RBI: Operate under the RBI’s Banking Regulation Act, 1949, and other relevant regulations.
- Basic Banking Services: Offer savings accounts, current accounts, fixed deposits (FDs), recurring deposits (RDs), and loans.
- Scheduled Bank Status: SFBs receive this status upon meeting specific criteria under the RBI Act, 1934.
- Focus on Priority Sectors: At least 60% (earlier 75%) of their Adjusted Net Bank Credit (ANBC) is allocated to priority sectors like agriculture and small-scale industries.
- Capital Requirements: Minimum paid-up capital is ₹200 crore, ensuring financial stability.
- No Subsidiaries Allowed: SFBs cannot establish subsidiaries for non-banking financial services.
- Regulation and Governance of Small Finance Banks: SFBs are governed by:
- Banking Regulation Act, 1949
- RBI Act, 1934
- FEMA, 1999
- Credit Information Companies (Regulation) Act, 2005
